This chapter discusses public goods and common resources. Public goods are non-excludable and non-rival, meaning one person's use does not reduce availability to others. They are underprovided by markets due to free-riding incentives. Common resources are non-excludable but rival in consumption. They are prone to overuse, or "the tragedy of the commons." The government can use policies like taxes, permits, and regulation to more efficiently provide public goods and manage common resources.

1. © 2009 South-Western, a part of Cengage Learning, all rights reserved
C H A P T E R
Public Goods and
Common Resources
Microeonomics
P R I N C I P L E S O F
N. Gregory Mankiw
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2. In this chapter,
look for the answers to these questions:
 What are public goods?
What are common resources?
Give examples of each.
 Why do markets generally fail to provide the
efficient amounts of these goods?
 How might the government improve market
outcomes in the case of public goods or common
resources?
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3. PUBLIC GOODS AND COMMON RESOURCES 2
Introduction
 We consume many goods without paying:
parks, national defense, clean air & water.
 When goods have no prices, the market forces
that normally allocate resources are absent.
 The private market may fail to provide the
socially efficient quantity of such goods.
 One of the Ten Principles from Chapter 1:
Governments can sometimes
improve market outcomes.

4. PUBLIC GOODS AND COMMON RESOURCES 3
Important Characteristics of Goods
 A good is excludable if a person can be prevented
from using it.
 Excludable: fish tacos, wireless internet access
 Not excludable: FM radio signals, national defense
 A good is rival in consumption if one person’s
use of it diminishes others’ use.
 Rival: fish tacos
 Not rival:
An MP3 file of Kanye West’s latest single

5. PUBLIC GOODS AND COMMON RESOURCES 4
The Different Kinds of Goods
Private goods: excludable, rival in consumption
Example: food
Public goods: not excludable, not rival
Example: national defense
Common resources: rival but not excludable
Example: fish in the ocean
Natural monopolies: excludable but not rival
Example: cable TV

6.  A road is which of the four kinds of goods?
 Hint: The answer depends on whether the road
is congested or not, and whether it’s a toll road
or not. Consider the different cases.
A C T I V E L E A R N I N G 1
Categorizing roads
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7.  Rival in consumption? Only if congested.
 Excludable? Only if a toll road.
Four possibilities:
Uncongested non-toll road: public good
Uncongested toll road: natural monopoly
Congested non-toll road: common resource
Congested toll road: private good
A C T I V E L E A R N I N G 1
Answers
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8. PUBLIC GOODS AND COMMON RESOURCES 7
The Different Kinds of Goods
 This chapter focuses on public goods and
common resources.
 For both, externalities arise because something
of value has no price attached to it.
 So, private decisions about consumption and
production can lead to an inefficient outcome.
 Public policy can potentially raise economic
well-being.

9. PUBLIC GOODS AND COMMON RESOURCES 8
Public Goods
 Public goods are difficult for private markets to
provide because of the free-rider problem.
 Free rider: a person who receives the benefit of
a good but avoids paying for it
 If good is not excludable, people have incentive
to be free riders, because firms cannot prevent
non-payers from consuming the good.
 Result: The good is not produced, even if
buyers collectively value the good higher than
the cost of providing it.

10. PUBLIC GOODS AND COMMON RESOURCES 9
Public Goods
 If the benefit of a public good exceeds the cost of
providing it, govt should provide the good and pay
for it with a tax on people who benefit.
 Problem: Measuring the benefit is usually difficult.
 Cost-benefit analysis: a study that compares
the costs and benefits of providing a public good
 Cost-benefit analyses are imprecise, so the
efficient provision of public goods is more difficult
than that of private goods.

11. PUBLIC GOODS AND COMMON RESOURCES 10
Some Important Public Goods
 National defense
 Knowledge created through basic research
 Fighting poverty

12. PUBLIC GOODS AND COMMON RESOURCES 11
Common Resources
 Like public goods, common resources are not
excludable.
 Cannot prevent free riders from using
 Little incentive for firms to provide
 Role for govt: seeing that they are provided
 Additional problem with common resources:
rival in consumption
 Each person’s use reduces others’ ability
to use
 Role for govt: ensuring they are not overused

13. PUBLIC GOODS AND COMMON RESOURCES 12
The Tragedy of the Commons
 A parable that illustrates why common resources
get used more than is socially desirable.
 Setting: a medieval town where sheep graze on
common land.
 As the population grows, the # of sheep grows.
 The amount of land is fixed,
the grass begins to disappear from overgrazing.
 The private incentives (using the land for free)
outweigh the social incentives (using it carefully).
 Result: People can no longer raise sheep.

14. PUBLIC GOODS AND COMMON RESOURCES 13
The Tragedy of the Commons
 The tragedy is due to an externality:
Allowing one’s flock to graze on the common land
reduces its quality for other families.
 People neglect this external cost, resulting in
overuse of the land.

15.  What could the townspeople
(or their government)
have done to prevent the tragedy?
 Try to think of two or three options.
A C T I V E L E A R N I N G 2
Policy options for common resources
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16.  Impose a corrective tax on the use of the land
to “internalize the externality.”
 Regulate use of the land (the “command-and-
control” approach).
 Auction off permits allowing use of the land.
 Divide the land, sell lots to individual families;
each family will have incentive not to overgraze
its own land.
A C T I V E L E A R N I N G 2
Answers
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17. PUBLIC GOODS AND COMMON RESOURCES 16
Policy Options to Prevent
Overconsumption of Common Resources
 Regulate use of the resource
 Impose a corrective tax to internalize the externality
 example: hunting & fishing licenses,
entrance fees for congested national parks
 Auction off permits allowing use of the resource
 example: spectrum auctions by the
U.S. Federal Communications Commission
 If the resource is land, convert to a private good
by dividing and selling parcels to individuals

18. PUBLIC GOODS AND COMMON RESOURCES 17
Some Important Common Resources
 Clean air and water
 Congested roads
 Fish, whales, and other wildlife

19. PUBLIC GOODS AND COMMON RESOURCES 18
CASE STUDY:
“You’ve Got Spam!”
 Some firms use spam emails
to advertise their products.
 Spam is not excludable:
Firms cannot be prevented
from spamming.
 Spam is rival: As more
companies use spam, it becomes less effective.
 Thus, spam is a common resource.
 Like most common resources, spam is overused –
which is why we get so much of it!
“Spam” email is named
after everyone’s
favorite delicacy.

20. PUBLIC GOODS AND COMMON RESOURCES 19
CONCLUSION
 Public goods tend to be under-provided, while
common resources tend to be over-consumed.
 These problems arise because property rights
are not well-established:
 Nobody owns the air, so no one can charge
polluters. Result: too much pollution.
 Nobody can charge people who benefit from
national defense. Result: too little defense.
 The govt can potentially solve these problems
with appropriate policies.

21. CHAPTER SUMMARY
 A good is excludable if someone can be prevented
from using it. A good is rival in consumption if one
person’s use reduces others’ ability to use the
same unit of the good.
 Markets work best for private goods,
which are excludable and rival in consumption.
Markets do not work well for other types of goods.
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22. CHAPTER SUMMARY
 Public goods, such as national defense and
fundamental knowledge, are neither excludable
nor rival in consumption.
 Because people do not have to pay to use them,
they have an incentive to free ride, and firms have
no incentive to provide them.
 Therefore, the government provides public goods,
using cost-benefit analysis to determine how much
to provide.
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23. CHAPTER SUMMARY
 Common resources are rival in consumption but
not excludable. Examples include common
grazing land, clean air, and congested roads.
 People can use common resources without paying,
so they tend to overuse them.
Therefore, governments try to limit the use of
common resources.
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